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A Bailed-Out Bank Now Tests Treasury's Willingness to Step In

By

Meena Thiruvengadam

Updated June 7, 2010 12:01 a.m. ET

By missing a sixth quarterly dividend payment due to the U.S. in May, a Southern California bank is poised to test just how far the government will extend its reach into the smaller corners of the private sector.

Saigon National Bank, a Westminster, Calif., bank focused on making loans to the area's Vietnamese business community, hasn't paid any dividends since obtaining $1.55 million in taxpayer funds in December 2008.

"We can't pay a dividend without OCC approval, and they haven't approved payment of the dividend," Saigon's Chief Financial Officer
Roy Painter
said, referring to the Office of the Comptroller of the Currency, which regulates the bank.

Saigon National is so far the only government-aid recipient to have missed six dividend payments, which triggers the Treasury's right to appoint two directors to a bank's board. A dozen others are close, but it isn't clear whether the Treasury will exercise its right to appoint directors at the institutions.

The Treasury still is considering its options,
David Miller,
chief investment officer for the Treasury's Office of Financial Stability, told lawmakers last month. But as the U.S. considers just how involved it will get with the mostly small banks that are behind on payments, missed payments are stacking up.

The number of banks missing dividends has been rising each quarter, with 74 missing a February due date—some because of regulatory restrictions. By February, a dozen banks were behind by at least four payments. At least one of them, Kansas-based Bank of Blue Valley, missed a fifth payment in May.

"We have the cash to pay the dividends, but our primary regulator is saying preserve your capital right now," said
Mark Fortino,
Bank of Blue Valley's chief financial officer. "Things are much better than they were, but we're still not making the millions that we used to make."

If the experience of Ally Financial is any example, Bank of Blue Valley, Saigon National and several other institutions may see the Treasury appoint members to their boards. The Treasury last month exercised its right to appoint a member to the board of Ally, the lender formerly known as GMAC Financial Services. The Treasury in December boosted its support to the lender, taking a 56% equity ownership stake and getting the right to appoint four directors.

Should the Treasury decide to appoint board members at banks, however, it could face a challenge. Many banks have suspended payments to directors and the positions themselves have lost prestige as public sentiment toward the financial sector has soured.

"Trying to find good directors for community banks right now is rather difficult," said
Rob Klingler,
an attorney with Bryan Cave LLP in Atlanta. He noted, however, that banks don't seem worried about having the government select board members.

"If they want to send someone to our board meetings, we have no issues with that," Mr. Fortino said. "Frankly we want their input."

Saigon's Mr. Painter took a similar stance. "I would expect someone that the Treasury would submit would be quite qualified and probably would provide us with good input for running the bank," he said.